Contractors and a Case for Strategy
You don't need a strategic plan to make money - you only need a strategic plan if you want to build more than jobs and make better-than-average profits.
Anyone involved in the business side of the industry knows that construction is as tough as a business gets. While it's true that profit margins are thin, risk is outrageously high, and return on invested capital averages less than ten percent, it's also true that contracting can offer superior return, requires limited investment, and offers a reasonable home for the entrepreneurial spirit. The application of strategy and strategic thinking to the management of a construction organization is often the real difference between long-term success and business failure.
Success in construction is dependent upon how well a business positions itself with customers and outperforms competitors. What does that have to do with strategy? Everything. As a contractor, you do not need a strategic plan to build jobs, bid work, and make money. Those things can be accomplished, to some extent, even in a reactive mode. On the other hand, how do you build something more than jobs? How do you make better than average profits? How do you become an enduring, great contracting firm?
That level of achievement does require the contractor to understand and apply the concepts of strategic management and planning to the business. The good news is that it's not necessarily hard to do. It does require some time, energy, effort, and resources appropriately channeled. Done correctly, however, it has everything to do with long-term success in the business. There are two major reasons for a contracting organization to develop and use a strategic plan. The first is to build competitive advantage. All too often, contractors are assumptive about their business: they assume that the business trades only on price, or they assume that they simply have to take the market as it comes.
Sustainable competitive advantage can come only if you can look at the same situation that everyone else sees, but figure out a way to see it differently. In other words, the firm must develop a marketable, differentiated, or otherwise superior competitive position.
Positioning is not easy, and it takes sterling execution for the payoff. However, the real point is simple: if you don't try, you never have a shot at winning. You must engage the strategic management process if you ever hope to develop a superior competitive position.
This point leads into the second major reason for contractors to employ a strategic plan: leadership. Contractors are not immune to the emergence of decisive leadership as a growing basis for business effectiveness.
In talking with construction company CEOs, I often enjoy asking them exactly how they spend their time. Their answers often confirm that top managers are too immersed in short-term operations. Some CEOs will say that they still come in at 6 a.m. and talk personally with each superintendent about the jobs and their activities for the day. While being in touch is nice, that routine sounds like project management or VP operations work if it's done regularly.
Some presidents say they like to look at job cost reports and do detailed analyses on their financial statements. That task seems like something the controller or CFO should be doing.
On what, then, should the CEO be spending his time? In many cases, the answer to that is not routine management, but firm leadership. In fact, it is leadership that builds dynamic, enduring contracting firms. If you are doing $20 million worth of work, always plan to do that, and you are making all the money you want, read no further. However, if you are interested in really building a highly charged, powerful contracting firm, someone must establish the plans and specs for it. If it's not being done at the top, I can assure you it's not being done.
On the surface, opportunistic planning may sound like a contradiction in terms. In reality, the success of many endeavors is dependent upon opportunism rather than "grand strategy." It means your strategy might be built around opportunistic behavior.
However, this concept of combining strategy and opportunism is where many classic entrepreneurs get lost. They experience success through reactivity and opportunism, so they begin to believe that any strategic application is nonsense and the real trick is to "just get out there and do it."
They fail to recognize one essential truth: opportunism can create instant wealth or success - but it can't make it enduring.
In their book, Bottom Up Marketing, Al Reis and Jack Trout make the point that an effective competitive attack can be built from a successful tactic. In other words, planning can occur from the bottom up, as well as from a more conventional goal-setting approach driven from the top. I know one contractor who built a major portion of a strategic plan around how fast his firm responded to client inquiries. Another opened a mechanical service business because he was getting inquiries from his client base.
These are good examples of letting a simple tactic (returns calls as fast as possible) blossom into a competitive strategy (over-communicate with the client). We will discuss later differentiating strategy from tactics. For now, simply bear in mind that strategic planning is not anathema to entrepreneurial behavior or opportunism. In fact, it is the simple application of more systematic thinking to the opportunities that may be available to the business. Properly structured, your strategic plan may in fact create or nurture innovative behavior. For example, one firm is driven by a major corporate goal to procure at least ten percent of revenues from industrial plant managers. What difference has that made to the company?
Prior to having formulated the strategic plan, the company made a few half-hearted attempts at industrial market penetration with limited success. Its selling efforts were somewhat diffused by targeting vice presidents, plant managers, industrial development boards, industrial real estate brokers, and a host of others. Today, the company still markets and sells to these people, and it should; they are important buyers and influencers. However, singling out plant managers resulted from some homework and sales analysis that suggested they were worthy of special attention. The goal has rallied intensive efforts and creative energies around serving and selling to plant managers. The net result has been a thriving industrial division which now does over one-half of the company's volume.
Once a contracting firm grows beyond the "mom and pop" size, it becomes like any other business. It does not need a strategic plan to survive, but it probably does need one to really thrive.
At the same time, plenty of larger contracting firms also grow stagnant through their failure to apply strategic processes to the business. It takes an enduring, great company to perpetuate wealth, and it takes vision and strategy to build a great company.
A particularly good route to strategy might be to leverage from the company's most successful tactics. In other words, what does the company do (or what might it do) that works particularly well with customers?
For example, one contractor I know built his entire business around one simple concept: how phone calls are handled. Answering the phone reasonably well is a tactic. But an absolute, unwavering, company-wide commitment to handling phone calls and returning customers' calls better than ANYONE ELSE in the business has become a real winning strategy. Consider, no phone screening, special client reception systems, no voice mail and home phone numbers to clients.
These practices make for an absolute, dogmatic commitment to the phone. At that point, a simple tactic becomes a winning strategy.
Since strategy is all about getting a competitive edge, tactics that are brilliantly executed can become an effective strategy. Not all strategy should be built from tactics, but tactical analysis is a good way to begin identification of potential strategies. Look at your execution and look at what matters to clients. While it's best to play to existing strengths, look also at what your company might be good at doing if everyone could see the potential and rally behind the idea. To use the winning tactic as a strategy, the trick is to figure out what excites the customer and your people at the same time. If you can do that, you might already be practicing one of your best potential strategies.
Searching for the Excellent Contractor
Since our firm works exclusively with contractors, we are often asked, "What are some of the common elements of success in the construction industry?" The specifics vary, but we are in a uniquely qualified position to identify what characteristics seem to be embodied consistently in highly successful contracting organizations. From our experience and from the information we have compiled over the years, we will draw here a profile of the excellent contractor.
Cost Control at the Heart of All Activity
The most successful contractors we know have a keen sense for money. That may sound absurdly simple, but it's not. People's sense for money varies, and the best contractors are those who are just plain street smart. They think in quantitative terms, and everything translates to costs. They may not think of cost control as their primary marketing strategy, but they are good at it. More importantly, they have instilled it in their culture and trained others to be good at it.
A basic sense for money is a cultural phenomenon. If it's part of the culture, you can bet that the contracting firm will succeed.
Along with having a sense for money, our most successful contractors are those with a strong understanding of finance and accounting. Some people will argue that construction is about production, engineering, building, etc. That's nonsense. Construction is about margins. Without them, you do not last, period. Anyone who signs a legally binding contract to produce a physical work product in variable conditions for a net margin averaging about 2 percent needs to understand numbers.
Successful contractors also create a special culture within their firms. The specific cultures will vary, but the sense of some culture that gets created from strong leadership is a consistent trait. Some of our more successful clients do not even recognize this in themselves, but it's there. They lead in a way that reflects a consistent commitment to something. It may be visionary and dynamic, or it may be Attila-the-Hun style aggression, but it's real. Through consistently hammering on the same messages, these firms have done what the textbooks say you're supposed to do. They have created a special culture that drives behavior consistently, and with positive results.
If you don't like the softer concept of culture (although the trick is not letting it be a soft concept), try matching this trait with your successful contractor profile: they collect money and watch cash. Some of our clients can earn almost as much income from their cash management as they can from operations. The overriding point is that they recognize the real value of better cash flow. Most of our best-of-class contractors will have an average age of receivables of less than 45 days.
Create a Sense of Urgency and Intensity
Excellent contracting organizations have a sense of urgency that permeates them. We all know that construction is a tough and often reactive business. It's demanding and it demands people who understand action and how to get things done. In our best-of-class firms, that sense of urgency transcends just building jobs. It translates into a high level of competency in implementation of new ideas and organizational changes.
As one of our star contractors says, "Doing is not the hard part here. We sometimes struggle with ideas, but doing comes easy." If you think about it, many contracting firms have an unfortunate propensity toward the reverse of this statement.
With this sense of urgency comes a level of project management intensity. Our most successful contractors don't just build a job; they go after a job. Their orientation is not toward protecting their estimated margins, but toward what we call Margin Aggression. Margin Aggression involves a cohesive set of project management principles and practices designed to improve upon established project objectives. It's part cultured mindset, but also part practice. Most importantly, it means that project managers exercise a level of urgency and intensity in managing their projects and embracing the P&L accountability that goes with their job.
Create a Sense of Ownership
Successful contractors create a sense of ownership with their people. That doesn't mean an actual stock transfer or an ESOP, but rather some mechanism to impart a sense of ownership and feeling of accountability and responsibility (known these days as "empowerment"). Those mechanisms might include the use of "hard" vehicles, like stock appreciation rights or stock options for key people. They might consist of "soft" vehicles, like participative planning, quality initiatives, or recognition systems. Typically, this kind of climate is established through a combination of these measures.
However, successful contractors recognize two essential principles that compel a sense of ownership. This first principle is simple: companies don't do anything; people do things. The second principle is a corollary, and equally simple. People don't do things for any reason other than their own. To develop a sense of ownership, successful contractors have established systems which encourage people to go after the right results, but to do it for their own reasons.
Successful contractors have great people. That sounds pretty fundamental, but it sometimes amazes us that many firm presidents settle for mediocre talent, and then wonder why they have production problems or why they are consistently beat on bid day. No organization rises far above the level of its people. If you want to build an enduring, great construction firm, it will have to be built on great people.
Hire the Best, Forget the Rest
Occasionally, we meet the company officer who says, "I'm really the best estimator in our company. If we really want the job, it'll need my sharp pencil on it." Or, "I've got some guys that can get out there and get things going, but if you really want the work to run the right way, then I'd better be there." The only thing you can think is: how sad. As one of our thriving contractors in eastern North Carolina says, "I realized a long time ago that the secret to my success would be in finding and keeping people a whole lot better than me."
That sounds simple, but so many high-level executives fall easily into the trap of fearing internal competition from subordinates, or simply are ego-driven to beat their own people at the company's activities. At the most successful contracting firms, top officers normally hire with the objective of turning around one day and realizing that if they had a job opening, they wouldn't hire themselves to fill it.
Great contractors avoid worrying about what the new hire "will cost" as opposed to what he can produce. In other words, it's well worth paying marginal cost for the right talent. For example, if project manager salaries fall in a $20,000 range in your company, and you're considering one candidate for $40,000 and another for $50,000, the $10,000 differential is an absolute non-issue. In most cases, if the right talent can even minutely affect the margin on his jobs more positively, the marginal salary investment will be paid back to the company in spades. Pay for the right talent. It's well worth it.
Successful contractors focus their resources. That means that they must move beyond "pure entrepreneurship" fairly early in the company's life cycle. They develop an understanding that all companies have limited resources and that the key to effective growth and penetration comes from harnessing and focusing those resources.
To many entrepreneurs, everything looks like an opportunity. They grab frantically in an attempt to capture everything they can. This can work well in the firm's inception and even in the early stages of growth. However, in the later stages of growth, this entrepreneurial strength begins to become an Achilles' heel, unless the firm's leadership begins to develop focus. That translates not only to market selectivity, but project selectivity as well.
When you put all of this together, what profile emerges for the excellent contracting organization? From our experience, a clear profile emerges. Successful contractors are numbers oriented and financially astute. They build cultures that are special, and they invest in good talent. They then vest those cultures and people with a sense of focus, urgency, intensity, and ownership. The good news is that it can happen by design, and there is no reason that designer couldn't be you.